Companies Paying Their CEOs More Than the Taxman

The press recently had a field day with a report from the “Institute for Policy Studies” about executive pay. The report said the of the 100-highest paid U.S. CEOs in 2011, “26 took home more in CEO pay than their companies paid in federal income taxes.” The message was not subtle at all. Americans pay a lot of money in taxes. CEOs, on the other hand, can profit richly even if they do not pay the Treasury its fair share. What the Institute does not take into account is that most CEOs are paid for financial and stock performance and not the amount of taxes being paid. The argument about tax payments and compensation, at least in part, misses the mark.

Some of the outrage about tax payments and CEO pay is fair. Citigroup and AIG (NYSE: AIG) received tens of billions of dollars in government bailout money. Yet the two have been able to avoid tax payments in 2011. The taxpayers, who provided the bailout funds, feel they have been used. Citi and AIG would say that they fully comply with the U.S. tax code. The average American is still unlikely to look at the arrangement as reasonable. But without the bailout, the banking systems might have collapsed. That, in turn, could have been even worse for taxpayers. For the American who pays a normal tax rate on $50,000 a year, the bailout payments and tax treatments of these two large financial firms were a “no win” situation.

Some of the CEOs on this list almost certainly earned what they received, no matter how good or bad their tax offices were at saving money that might have otherwise gone to the IRS. Alan Mulally of Ford (NYSE: F) saved his company from the Chapter 11 fate that befell GM NYSE: GM) and Chrysler. Randall Stephenson of AT&T (NYSE: T) has presided over the expansion of one of the largest wireless carriers in the world.

What is rarely said about the companies on this list is that they do pay taxes. Each one makes the required payments to the federal and state governments on the employee benefits it pays. And the federal level is not the only one at which taxes are paid. States and municipalities may get payments when the IRS does not.

24/7 Wall St. identified the seven companies on the Institute’s list with 2011 global profits, or net income, of $4 billion a year or more. We looked at IPS data on how much corporations paid in taxes (or received in subsidies if negative), and how much the CEOs made in 2011. We also looked at 2011 and 2010 revenue and 2010 net income, along with the stock change in 2011, to gauge whether the CEO’s pay was adequately aligned with performance. Finally, we also considered major company decisions and strategies to get a better sense of whether CEOs are fairly paid.